A Dash of Coldwater Economics

US CPI Surprise - What it Means for US and Global Inflation

The US July CPI result was better than expected, with headline inflation moderating to 8.5% yoy (from 9.1% in June), mainly thanks to a 4.6% mom fall in energy costs. This was on the back of a 10.4% mom fall in Brent oil prices and a 8.5% mom fall in Nymex natural gas prices. It is not obvious this is being repeated in August: so far, on average oil prices have fallen a further 7.5% mom, but gas prices have rebounded 12.6% mom, and overall the CRB index, which fell 9.5% in July, is almost unchanged. Still, July's result is strong enough to allow us to scale back the likely inflationary trajectory in the US, with it now expected to peak at 9.1% in September, before drifting down to below 8% by end-2Q23.  But two caveats. First, I'm fashioning these trajectories from the 6m deviation in 5yr seasonalized trends - but volatilities in CPI indexes during the last six months have been consistently dramatic (both above and below trend), and in some cases (UK) positively freakish. So even a 6m trend assumption isn't looking particularly stable month-on-month.   Second, whilst inflationary pressures may be moderating in the US, they are only now beginning to show up in force in NE Asia. Overall, this means that my measure of global aggregate inflation continued to rise in July. . . .

US 2Q GDP - Profits and Stockmarket Valuations

I'm less concerned with the recession/no-recession arguments (hey, don't US politics just absolutely fascinate you?  Me neither), than with the implications for profits and stockmarket valuations. Three observations:  1. Regardless of headline GDP, once you strip out extremely volatile inventory-flows, there's been essentially no growth in final sales of domestic product now for five quarter.  There's just no momentum at all.  2. The massive fiscal stimulus has not yet completely been washed out of the Kalecki profits reckoning. I calculate profits were down 7.4% qoq and 19.4% yoy, mainly thanks to the fiscal deficit moderating.  But there's worse - the profits/GDP ratio has fallen to its lowest level since 1Q16 - so there's cyclical as well as one-off structural pressure at work.  3. All of which means the S&P500 remains overvalued on my slow-model basis, which has been essentially on the money for the last 30 years. July's rally will extend that overvaluation. So the vulnerability continues, and rises.

The US Camel's All Tapped Out

The speed and severity with which data from the US has collapsed over the last month is extremely unusual.  Why is the outbreak of inflation doing such damage so quickly.  One reason is the way in which the US profits model has changed over the years, until since 2000 to the present day, 77.6% of Kalecki profits are attributable to household and government dissavings, whilst only 22.4% come from net investment and net exports.   Compare that to 1960-1980, when net investment and exports accounted for 65.7% of profits, with h'hold and govt dissavings generating only 34.3%.  Let's state the obvious: if your profit model depends disproportionately on h'holds and governments spending more than the earn, sooner or later, even the strongest financial balance sheet will become impaired, fragile. And it's that financial fragility which is kicking in, and kicking down, right now.

ECB's Transmission Protection Instrument, UK's Shocking Interest Payments

Two things today: first, a closer look at the ECB's so-called 'Transmission Protection Instrument'.   Short take: it's open ended, with only decorative conditionality. The real constraint is that it mustn't inflate the ECB's balance sheet. So if it wants to do anything other than short-term fire-fighting in (say) Italy's bond market, it will have to do so by selling (say) German bonds.  That'll make ECB meetings fun to watch.  Second thing: today's UK public sector deficit of £22.1bn featured an astonishing £19.9bn in interest payments. That's 23% of total spending, which is 6.2SDs above the long-term average.  Cui bono? Why, chancellor Rishi Sunak of course, hoping to step up to become PM on a Treasury-determined manifesto of immediate recession-inducing tax rises.  That unprecedented shock of interest payments could almost have been designed to illustrate the Treasury's - sorry, Rishi's - argument.  And probably was - 6.2SDs after all.

UK Inflation - No Good News

The UK is about to enter the strange and disturbing world of sustained double digit inflation. We can tell that from the underlying trends generating June's 9.4% yoy headline CPI, but also by the way the gap between input PPI (24% yoy) and output PPI (16.5% yoy), and the gap between output PPI and CPI are continuing to widen.  Not until we see some evidence that the pressure to 'pass-through' factory inflation pressures has peaked can we expect headline CPI to retreat.  There's no sign of that yet.